Global South Central Banks are showing us how climate change challenges can be addressed

I was recently in Dakar, Senegal, for a conference organized by the Central Bank of West African States (BCEAO), exploring how climate change impacts financial stability, and the implications for policymakers.

It brought home to me that while the discourse around climate change and green finance remains visibly driven by the Global North, with a focus on mobilizing capital investment, climate risk disclosure requirements, and bank lending portfolio quality, it’s the Global South that is most vulnerable to climate impacts, and from where real solutions are emerging.

The impact of climate change is very real across the African continent. Floods, droughts, rising sea levels, desertification and unprecedented storms are causing havoc. Lives are being devastated, and livelihoods lost.

The African Development Bank projects that Western and Eastern Africa could lose 15% of their GDP by 2050, as a result of climate impacts. Aside from the tragic human suffering, climate change’s stark economic impact demands that we ask ourselves: what can we do?

Why should Central Banks meddle in climate change issues?

Here, it’s worth reflecting that the mandates of Central Banks in emerging and developing economies have been constantly evolving for more than 15 years. While Banks share a common primary mandate to ensure price stability, their responsibilities and objectives now reflect broader economic and social policy concerns. For example, financial stability has been explicitly incorporated in the mandates of many Central Banks since the global financial crisis in 2008, whilst many Global South Central Banks have – either explicitly or implicitly – added the dimension of financial inclusion to their financial stability mandate.

Central Banks concerning themselves with climate change, therefore, is not mission creep, or a shift in mandate. Rather, it involves them deepening their existing financial stability mandate. It is a necessary response to critical global developments.

What are Central Banks already doing in this area?

Many Central Banks have recognized that one of the most powerful solutions is inclusion. Inclusive Green Finance, an approach pioneered by the AFI network, works to advance climate resilience and emissions reduction through access to financial services:

To explain how this works, let’s take the case of an African farmer. I invite you to consider:

• when there is massive flooding, the advantages of holding savings in a bank account, rather than in livestock
• with impending drought, the advantages of being able to access a loan to invest in better irrigation
• after a climate disaster, being able to access government support or a transfer from a relative through a mobile phone
• the benefits of accessing insurance to insure crops against climate-induced locust infestation or drought

While in Dakar, I shared some examples of how smart interventions from central banks and financial regulators are building climate resilience:

• In Egypt, the Central Bank has made affordable credit available for farmers to invest in better irrigation systems.
• In Fiji, the Reserve Bank has initiated mobile payments for government remittances to people affected by cyclones.
• In Armenia, the Central Bank has coordinated the development of climate risk insurance products for the agriculture sector.

 
Do climate resilience interventions provide value for money?

Policy interventions can make a major difference for modest output. Examples include developing green taxonomies or definitions, implementing Environmental (and Social) Risk Management Guidelines, or collecting demand-side data on Inclusive Green Finance. 

More broadly, the Global Commission on Adaptation, launched in 2018 by UN Secretary General Ban Ki-moon, estimates that investments in improved climate resilience generate benefit-cost ratios of from 2:1 to 10:1, and in some cases even higher.

In other words, investing in climate resilience represents money well spent.

Where do we go from here?

The Central Banks and financial regulators that make up the AFI Network have made it clear that Inclusive Green Finance is a priority. AFI will organize a public-private partnership dialogue meeting on the topic at the upcoming IMF/World Bank Spring Meetings, and follow-up sessions at the AFI Global Policy Forum in September.

Helping vulnerable populations build climate resilience through access to financial services is good for environmental sustainability, and good for economic growth. Through Inclusive Green Finance, we can build resilience against climate impacts and green the financial system simultaneously, transforming society for the better, while leaving no-one behind.